Popperian Traders

April 26, 2007

I’m reading Steve Fuller’s Kuhn vs. Popper to limber up for Taleb’s lecture next week. Popper has a couple of famous trading adherents: Soros and Taleb. Popper’s key idea is that science proceeds by falsification, not verification. For example, the observation of a single black swan falsifies the hypothesis that “all swans are white”. Falsifiability is what distinguishes scientific conjecture from other disciplines that merely claim to be scientific. Kuhn, in the Structure of Scientific Revolutions, points out that many other factors beyond falsification, including social ones, determine which theories scientists advocate.

It’s not surprising that Popper appeals to traders with a philosophical & scientific outlook. If you have a hypothesis about the market that conjecture becomes directly open to falsification when you put a trade on. If the trade loses money, your hypothesis is falsified.

And it’s also not surprising that the Kuhnian viewpoint, with its social explications, isn’t advocated by philosophically minded traders with a strong empirical bent, like Taleb and Niederhoffer. However, I would expect it to be sympathetic for market theorists who adress human factors more directly, as per behavioural economics. And I’d expect Feyerabend’s epistemological anarchism to be appealing to philosophically minded traders who are agnostic about styles and methods. After all Feyerabend tells us there can be no rules for conducting scientific investigation, falsifiability or otherwise. The only possible rule is “anything goes!” Translated into trading that means we can entertain technical analysis, growth, value, momentum, contrarian or Niederhoffer’s ever changing cycles. Anything goes – the only thing that counts is what makes money.